GSR's Andy Baehr on Crypto Rally Signals and DeFi Lending Rates

Organized & Compiled by Deep潮 TechFlow

Guest: Andy Baehr, Managing Director of Asset Management at GSR

Host: Steve Erlic, Research Director at Sharplink

Podcast source: Bits & Bips (an interview series by Unchained)

Is This Crypto Rally Real? GSR's Andy Baehr Maps the Signals to Watch

Broadcast date: July 17, 2026

Disclosure: GSR is a leading global crypto market maker, with revenue dependent on trading volume and volatility; its asset management division recently launched the Core3 ETF (BESO), which holds BTC, ETH, and SOL. The guest in this episode discusses overall market trends and does not provide recommendations on any specific asset.

Andy Baehr previously led product and research at CoinDesk Indices and held leadership roles in the derivatives divisions at Credit Suisse, BNP Paribas, Morgan Stanley, and Deutsche Bank. He now oversees asset management at GSR, one of the world’s largest crypto market makers. His framework for assessing market conditions is straightforward: the market slides along a spectrum, with “ambivalence” at one end and “conviction” at the other. Currently, the market is stuck at the ambivalence end, where every rally resembles a single-stage rocket—once the first stage burns out, there’s no second stage to propel it further. He identifies three key signals to monitor: DeFi lending rates, the unexpected passage of the CLARITY Act, and the formation of a Fed “hawkish peak” consensus. The most direct indicator is whether the recent rally triggered by last week’s CPI decline can sustain itself—check the USDC borrowing rate on Aave. It’s currently around 3.75%, roughly in line with U.S. Treasury yields. This number alone tells you exactly what low energy looks like.

What is "Fed Day"?

• Since 2022, we haven’t truly seen a hawkish peak. At that time, the Federal Reserve aggressively raised interest rates to offset post-pandemic fiscal stimulus, making both crypto assets and stocks struggle, as we didn’t know how high rates would go before stopping.
• Imagine a "Fed peak" — the moment when we collectively feel, "Alright, we know where rate hikes will end." Before that, it's hard to believe any rally will last.
• Once we pass that peak and can see the other side of the slope, market sentiment will shift rapidly.

Three Levels of Market Energy

• Approximately two-thirds to three-quarters of the entire crypto market consists of derivatives trading, with only one-quarter to one-third being spot trading. Derivatives are too important in determining price direction.
• Last year’s perfect rebound occurred in three phases: first, an ETH short squeeze; second, crypto-native traders flooded the spot and perpetual markets upon recognizing the trend; third, ETF funds began net inflows, with ETH ETF inflows even surpassing those of BTC in May and June.
• If the rebound doesn't attract layer upon layer of buying pressure, it's just a single-stage rocket—it burns out and falls back down.

Monitoring DeFi interest rates is more useful than watching K-lines.

• After the presidential election last November, lending rates on Aave surged above 20%. Now? They’re around the risk-free rate, between 3.75% and 4.1%.
• The absence of a credit spread indicates that no one is willing to pay a premium to borrow money for leverage. This is the most direct evidence of low energy.
• Imagine Warsh wakes up one morning, drinks an unusually strong cup of coffee, and decides to cut interest rates. Asset prices rise, Bitcoin rallies, and people flood to Aave to borrow. Because it’s a supply-and-demand-based pool, DeFi interest rates spike instantly—and that’s when you realize the market has real momentum.

The DAT Treasury company is currently unoccupied.

• Strategy just sold nearly $500 million in stock through an ATM and didn’t buy a single penny worth of Bitcoin. They kept the funds to pay preferred stock dividends.
• DAT buyers should enter during the middle of the rebound, as it takes time for shareholder sentiment to transmit. However, ETF funds are not long-term capital, as the past eight weeks have demonstrated.

CLARITY Act: from 75% to less than 40%

• The longer something is delayed, the less likely it is to be completed. Right now, we need almost zero distractions and a strong tailwind just to finish within three weeks.
• Polymarket's probability has declined linearly from 75% in May to under 40% today. Every additional day without passage is a wasted day.
• The ethics issue, in my view, is a "delicious political snack" that Democrats want to take home, and the disclosure of the president’s family profiting from digital assets has only added fuel to the fire.
• But if it does pass, the market will treat it as an unexpected event. Surprise is one of the most powerful emotions driving price fluctuations. It’s hard to imagine the market not rallying after its passage.

Steve Erlic: The June CPI rose 3.5% year-over-year, and core CPI matched month-over-month for the first time in five years. This was the most direct trigger for this rally. However, many of the reasons for the CPI decline appear to be one-off and may not recur next month. Kevin Warsh stated during his congressional testimony that “inflation is a choice,” suggesting he could maintain a hawkish stance. How do you view the nature of this rally?

Andy Baehr: We’ve been using the term “ambivalence” to describe the market’s state for most of Q2 and even the end of Q1. Ambivalence doesn’t mean the market doesn’t care what it’s doing. You’ll see seemingly credible pulse-like rallies, even a slight return of energy in the perpetuals market, only for the rally to quickly fade, trigger liquidations, and revert back to where it started.

Bitcoin surged past $80,000 from a high near $79,000 around the Spring Consensus conference, then dropped steadily to around $61,000, nearing the production cost line. This process actually re-energized the market, but we remain in this ambivalent phase.

The opposite of ambivalence is conviction—that is, you can reliably count on the rebound to continue, truly forming a different momentum cycle. The key question is: Is this just another single-stage booster rocket, or has this time finally started to grow legs?

From a broader perspective, we are currently in an environment where we don’t know where the hawkish peak lies. The last time this occurred was before 2022, when the Fed aggressively raised rates to absorb post-pandemic fiscal stimulus, making both crypto assets and stocks extremely difficult to endure. Why? Because we didn’t know where the hawkish peak would be.

Imagine "Fed Day"—that moment when we collectively feel at ease, knowing where rate hikes will end. We’ve appointed a new Fed chair, one we’re still getting to know, but who clearly isn’t someone who soothes markets. Until the collective understanding truly reaches that point, it’s hard to believe any rally can reliably hold.

Steve Erlic: What do you think about Warsh as Fed chair? He doesn’t want to provide forward guidance or publish dot plots. He wants the Fed to respond to data. But at the same time, he has a president who wants low interest rates.

Andy Baehr: Clearly, this is not a Fed chair trying to calm the markets. In his inaugural statement, he emphasized independence in bold, declaring he would not attempt to soothe the markets or over-communicate with them. This represents a completely new relationship between the world and the Fed chair.

His situation is also not simple. Energy prices have calmed down for now, but geopolitical tensions could cause them to spike again very quickly. People are largely uncertain about what will happen, but they’ve already priced those expectations into interest rate futures. Whether rates are raised early or late, and by how much, rate hikes are inevitable—we just don’t know where the endpoint will be.

For crypto, it ultimately comes down to two variables: inflation expectations and nominal interest rate expectations. In 2022, nominal interest rates rose sharply, directly surpassing inflation expectations, making it very difficult for Bitcoin, as expected real rates were rising. A more favorable macroeconomic backdrop for Bitcoin emerges when expected real rates are better understood. More practically, this also leads to greater clarity on the cost of fiat financing, enabling more leverage to flow into the crypto system. And the crypto market urgently needs leverage to restore the volatility and trading energy that have been declining since last October.

Steve Erlic: The Mag 7 continue to struggle, while AI stocks are surging. We’re seeing a rotation into small-cap cyclical stocks like the Russell 2000. What does this mean for risk sentiment, and how does it impact your view on the crypto market?

Andy Baehr: This makes me think about crypto’s performance in Q2. Although Q2 was poor overall, small-cap crypto tokens actually outperformed BTC, ETH, and SOL—even XRP rose, which is quite remarkable.

I created the CoinDesk 80 Index at CoinDesk, which covers mid- and small-cap tokens ranked 21st to 100th. Under any healthy or even merely neutral market condition, you should expect large-cap tokens to outperform small-cap ones, as collective market attention naturally focuses on assets with greater liquidity and larger market caps—this is a reliable indicator of normal market behavior. Q2, however, saw the opposite: small-cap tokens declined less than large-cap ones. This suggests capital is withdrawing from major assets across ETFs, perpetual futures markets, spot markets, and DAT treasury companies. This could be a sign of capitulation by the end of Q2.

Regarding market rotation, traders are chasing where the action is. The lack of momentum in crypto is due to other sectors offering more compelling opportunities—SpaceX’s IPO, Anthropic, OpenAI—causing funds to flow out of crypto ETFs to pursue these alternatives.

Steve Erlic: From a trading desk perspective, how is smart money positioning itself now? Who are the structural buyers? ETF funds are not permanent capital, as the past eight weeks have demonstrated. The supply of stablecoins has decreased by approximately $10 billion since May—the largest contraction since the Terra/Luna collapse. DAT’s treasury company is not among the buyers either. Strategy recently sold nearly $500 million via ATM and bought not a single cent of BTC, keeping the proceeds to pay preferred dividends. Metaplanet is in a similar situation.

Andy Baehr: We are bullish on DATs—they truly help complete the puzzle of the digital asset market: a treasury focused on a single digital asset, combined with local expertise to manage that asset. Your company and other successful DATs offer stock investors an intriguing way to gain exposure to digital assets, with additional features.

But what role did DAT play in last year’s perfect rebound? They weren’t among the first to enter. The textbook progression of last year’s rebound was: first, an ETH short squeeze, as a concentrated hedge fund position long BTC and short ETH began unwinding. Second, crypto-native traders noticed the trend forming and flooded into spot and perpetual markets. Third, in May–June 2025, ETF inflows reversed into net inflows, and ETH ETF inflows even surpassed BTC inflows—a startling development at the time. Then, the passage of the GENIUS Act added further momentum to ETH, given how many stablecoins rely on the Ethereum network.

DAT buyers should enter after this, during the middle of the rebound, as shareholder sentiment takes time to propagate and price appreciation generates further momentum for token purchases. They are structural, more permanent holders, unlike the more short-term-oriented ETF holders.

Steve Erlic: Have you noticed any specific signals changing? For example, bearish/bullish ratios or rising DeFi interest rates?

Andy Baehr: During my time at CoinDesk, I spent a lot of time monitoring Aave’s interest rates—we published a daily rate based on Aave. In the month following the presidential election last November, these rates surged above 20%. Now? They’re near the risk-free rate, between SOFR and the one-year Treasury yield, roughly 3.75% to 4.1%. The absence of a credit spread in DeFi’s money markets indicates that no one is urgently borrowing to leverage up.

The most interesting part is imagining a scenario: Warsh has an unusually strong cup of coffee one morning, feels great, and unexpectedly announces an interest rate cut. Asset prices rise, Bitcoin rises, and people rush to borrow on Aave. Because these are supply-and-demand-priced pools, interest rates on Aave, every Vault on Morpho, Gauntlet, Stakehouse, Beta, Concrete—all lending pools—spike instantly. People scramble to leverage up.

Leverage is what truly pushes prices higher—to levels that may trigger ETF fund inflows, DAT accumulation, or long-term holders entering the market. But before that, if you look at DeFi interest rates hovering near the risk-free rate, that’s low energy.

This is a very easy signal to monitor. These interest rate models are simple linear functions of supply and demand: the greater the supply, the lower the rate; the lower the demand, the lower the rate. When large amounts of supply flood these platforms saying, "Just give me any yield," rates naturally fall to their lowest levels.

Steve Erlic: You briefly mentioned new on-chain fixed-income products and Vaults. How do traders use these? How can retail investors use DeFi interest rates to gauge market sentiment?

Andy Baehr: Think about how most people interact with crypto assets—buying and selling tokens, trading perpetual contracts or options—all of these are asset-based activities that feel more like stocks or commodities in the traditional world. These models aren’t well-suited to creating fixed-income markets, money markets, or establishing a yield curve parallel to the traditional financial system.

DeFi is gradually developing fixed-income solutions. Without a central bank—only supply and demand—DeFi’s capital markets don’t require large institutions to influence the next day’s SOFR rate through overnight repurchase agreements; instead, people lend and borrow instantly. These activities are now forming clusters, allowing us to see approximately where stablecoin lending and borrowing rates should stand.

Vaults are a great packaging solution. Managers identify various lending pools and bundle them into a portfolio that issues a token representing ownership or yield rights. Essentially, it functions like a money market fund. Of course, it is not a fund or a security, and most are unregulated. But it operates 24/7 and is widely accessible globally. As long as users do their due diligence and understand what they’re participating in, it’s a highly efficient product.

From the perspective of our asset managers, the role of the Vault manager carries fiduciary-like responsibilities: being accountable for outcomes and providing transparent disclosures to Vault holders. This is how I view it through the lens of my CFA Code of Ethics and values, regardless of whether the law requires it. Money market funds are securities, and their evolution necessarily entails a clarification of the standards that managers must uphold.

Steve Erlic: Right now, the White House is holding a meeting. The President, Chief of Staff Susie Wilds, several Republican senators involved in negotiations, and Kristen Smith from the Blockchain Association are working to finalize an agreement on ethical provisions—this is crucial to securing Democratic support. A new version of the Senate bill could be released at any moment. If passed before the August 7 deadline, would this serve as a strong boost for the market?

Andy Baehr: In the long term, it’s crucial to pass legislation. It’s painful to think about how much time this industry—or related industries—may have wasted getting to where we are today. But the longer something is delayed, the less likely it is to ever be accomplished.

The probability on Polymarket has dropped from 75% in May to under 40% today, nearly in a linear decline. Every day that passes without completion is a wasted day. Regarding the ethics clause, I personally find it hard not to view this as a "delicious political snack" that some people want to take home and enjoy later. The disclosure that the presidential family has gained over a billion dollars in digital assets provides Democrats with a ready-made target.

But I do believe that if it passes, the market will treat it as an unexpected event—not something that was "already anticipated and not a big deal." Surprise is the most powerful emotion driving price movements. It’s hard to imagine the market not rally after its passage.